Antitrust Law Daily Wrap Up, ACQUISITIONS & MERGERS NEWS: EC to investigate acquisition of Telefónica UK by Hutchinson, (Oct 30, 2015)

By Linda O’Brien, J.D., LL.M.

The European Commission (EC) has opened an in-depth investigation under the European Union (EU) merger regulation to assess whether the proposed acquisition of Telefónica UK by a CK Hutchison subsidiary would harm competition, the Commission announced today. The Commission has concerns that the transaction could lead to higher prices, less choice, and reduced innovation for customers of mobile telecommunications services in the United Kingdom. The EC was notified of the transaction on September 11.

The proposed transaction would combine Telefónica UK with Three UK, a subsidiary of CK Hutchison Holding, based in Hong Kong. Telefónica UK is a subsidiary of Telefónica S.A of Spain. Three UK and Telefónica UK are both mobile network operators (MNOs) and provide mobile telecommunications services to end consumers in the UK, as well as in related markets such as the wholesale of network access and call origination.

The combination of Telefónica UK with Three UK, the second and the fourth largest mobile network operators (MNOs) in the United Kingdom, respectively, would create the largest MNO in the U.K.

The Commission’s initial market investigation raised the three main concerns. First, Telefónica UK and Three UK currently compete against each other in the retail mobile telecommunications market in the UK. The Commission has concerns that the transaction would remove an important competitive force and that the merged entity would have limited incentives to exercise significant competitive pressure on the remaining competitors. This would lead to higher prices and less investment in mobile telecommunications networks.

Second, the transaction would reduce the number of MNOs that are effectively willing to host mobile virtual network operators (MVNOs). Prospective and existing MVNOs would have less choice of host networks and hence weaker negotiating power to obtain favorable wholesale access terms.

Third, the reduction in the number of competitors following the merger risks leading to a weakening of competitive pressure and increased likelihood that MNOs will coordinate their competitive behavior and increase prices on a sustainable basis on the retail and wholesale markets.

In the United Kingdom, only two other MNOs are present in these markets—Vodafone and EE. In addition to these four MNOs, there are a number of MVNOs currently active in the market, the most important of which is Tesco Mobile UK, a joint venture between the retail supermarket chain Tesco and Telefónica UK.

The Commission will now investigate the transaction in-depth in order to determine whether its competition concerns are confirmed. The EC will in particular examine questions such as the extent to which the parties are close competitors, the market incentives that would be faced by the merged entity, and the potential reaction of its competitors.

“Mobile telecom services are increasingly important to consumers,” said Commissioner Margrethe Vestager, in charge of competition policy. “Both to keep in touch with family and friends and to access online services. With this investigation we want to ensure that consumers in the UK do not pay higher prices or face less choice as a result of this proposed takeover."

The Commission now has until March 16, 2016, to take a decision.

Companies: Telefónica UK; CK Hutchison Holding

News: AcquisitionsMergers Antitrust